The general property market had been extremely  firm and strong over the period of 2018 to 2023, with strong interest for good quality investment assets across most price levels.  Good quality properties which form solid investments with good quality tenant and lease covenants, situated in good locations, were in very high demand and as a result yields compressed over these years due to increased competition from investors.  High valued assets did still incur a slight yield premium over that of lower-cost investments.  In some instances, yields retracted to below 4.0% which would not be considered sustainable long term.

Over the past 12 months (2023 - 2024) there has been a noticeable change in investor confidence due to high inflation and more particularly increasing interest rates.  Confidence has weakened, but there has been very limited evidence to identify a strong downward trend of property values.

Commercial/industrial assets within Tauranga during 2022/2023 were achieving yields ranging from 4.5% to 7.5%, with an overall average in the vicinity of 5.5% for commercial properties, and 2.7% to 7.9%, with an average overall in the vicinity of 5.25% for industrial properties.  However, these included outlying assets such as low yielding properties ripe for redevelopment, with high underlying land values, and some under-rented or partially vacant properties. The majority of the evidence was between 4.5% and 5.5%.

More recently (2024), yields have softened considerably due to rising interest rates and higher inflation.  We have now seen the OCR increase from 0.25% (August 2021) to 5.50% (July 2024), with the latest review (August 2024) taking it back down to 5.25%.  The impact on investors’ expectations on yields is highly likely to mirror that of the OCR increases.  We are still seeing a few low yielding property sales, however these may be attributed to over-willing or uninformed purchasers who do not require financing or have alternate motives for purchase other than for investment purposes. Term deposit rates have risen significantly over the last 12 months with current deposit rates in the vicinity of 5.0% - 6.0% for low risk investment returns, therefore one would expect property yields to reflect a premium over that of low risk investments such as bank deposit rates.  There has been an absence of sales in Tauranga/Bay of Plenty to see any noticeable similar effects.  From experience, the commercial/industrial property market tends to lag some 6‑12 months behind the residential market. We have already seen some consolidation and reduction in property values in the residential market.  We can only therefore assume that the commercial/industrial market may follow a similar trend to the residential market.

The overall average of the initial yield for all commercial property sales analysed at Property Solutions occurring in Tauranga were as follows:

Historically, investment property has been well above Bank Term Deposit rates and tracked similar to banking funding rates. Current position is a significant divergence between the property investment rates, banking lending and term deposit rates indicating there may be a correction in the property capitalisation rates. 

The market is in a period of uncertainty. Historic yields were in the vicinity of 3.5%-5.0% during a period when the OCR was 0.25% and term investment interest rates were below 1.0% and lending interest rates were in the vicinity of 3.0% and 5.0%. As can be seen by the graph above, the OCR, term investment interest rates and lending interest rates have all increased significantly, however the property yields are yet to fully reflect these changes in the economy. We believe that there is a very strong possibility the property yields will increase to reflect the changing market.